SpaceX, Tesla, and Alphabet All Fall in a Broad Tech Rout. Should You Rebalance Your Portfolio?

It's been a rough past few days for many of the market's most popular tech stocks.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) shares are down more than 10% from their mid-May peak. Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA), too. While Micron Technology (NASDAQ: MU) shot higher in response to its blowout third-quarter earnings, that red-hot move may or may not last. Even the bullishness surrounding Space Exploration Technologies' (NASDAQ: SPCX) initial public offering appears to be fading, weighing on the broad market as well. There may be more marketwide downside in store, too, now that so many artificial intelligence (AI) stocks have revealed their vulnerability.

Is it time to reallocate your portfolio into something less aggressive and more defensive? The answer to the question, unfortunately, is two-parted: (1) Possibly, but (2) not necessarily.

Image source: Getty Images.

In the short run, a portfolio adjustment is not necessarily needed

The two-pronged answer isn't nearly as contradictory or undefined as it seems. The matter ultimately depends on how you were positioned before the current tech rout materialized.

You don't diversify your portfolio in response to what's happening at any given time. The point of diversifying your holdings is to defend yourself against the unknown before it happens ... like the sudden setback that just took shape (and may still be underway). The time to play defense was before now, by dialing back your exposure to technology stocks like Alphabet that had inherently expanded simply due to their oversize gains. If you're thinking about protecting your portfolio now, you're already too late. It wouldn't help much at this point.

That's not to suggest you simply do nothing from here. If you find yourself suddenly nervous about the prospect of more losses -- now that the market's questioning the actual value of highly inflated AI stocks -- it wouldn't be wrong to start shopping around for exit points.

There's the rub, of course. You're now shopping around for the best possible exit price that's nowhere near the exit price you could have had just a few days ago. Had you been regularly rebalancing, you wouldn't need to worry about this now. Lesson learned.

If the rebalancing question is more one that might redefine how you invest, however (growth versus value, income versus capital gains, etc.), things get trickier, yet also easier.

In the long run, adjustments are possibly needed

Yes, the past few days have been a somewhat painful wake-up call that maybe -- just maybe -- the euphoria surrounding the AI movement led too many investors into making too many ill-advised trades at less-than-great prices. It happens. If that's you and you now realize your portfolio is overweighted with too many aggressive (and expensive!) technology stocks like Tesla and Amazon, bailing out at recently lowered prices wouldn't be the end of the world. You'll be making an exit at levels you don't necessarily like. In the grand scheme of things, though, the recent setback hasn't exactly been a devastating one ... at least not yet.

But to this end, perhaps the stumble just since the middle of this month also marks a major pivot for the market's underpinnings.

Think about it. This bull market has been underway since late 2022, largely in step with the rebound from the economic lull resulting from the COVID-19 pandemic. That's a long time. And as is the case with most economic expansion cycles, technology stocks (boosted by the advent of AI) led this one. As we move into the latter half of this cycle, marked by higher inflation and interest rates, though, look for value sectors like energy, healthcare, utilities, and consumer staples to lead.

That doesn't necessarily mean tech names like Alphabet and Amazon can't also perform well from here. Indeed, if there's anything we've seen of late, it's that this economic cycle and its subsequent bull market are anything but typical; thank geopolitical tensions and the proliferation of a revolutionary technology for that.

Nevertheless, don't be afraid to take the subtle hint from the recent stumble, which is forcing a rethinking of AI's value. Ditto for AI stocks. Shakeups like these are often the triggering event for changes in a bull market's complexion.

No reason to panic either way

So, assuming your portfolio was already prepared for such a shift, you probably don't need to do anything now. On the other hand, if you now realize -- like plenty of other investors -- that your portfolio has slowly accumulated too many AI-related technology names, a rebalancing is arguably in order.

That doesn't mean your tech stocks are destined to tumble, nor is it a guarantee that lagging value sectors will finally have their day in the sun. Picking stocks still mostly remains a case-by-case basis.

Given that the whole point of diversifying your holdings is to protect yourself from what you can't know, though, the higher-odds play here is to make a point of dialing back your exposure to riskier, aggressive growth names like the aforementioned Micron and Amazon, and ramp up your exposure to more predictable picks. The Motley Fool recommends owning a minimum of 50 individual stocks, by the way, allocated across all styles and sectors.

This shift doesn't need to be rushed, however, although there's no particular upside in waiting either. Just take the time you need to do it right.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Micron Technology, and Tesla. The Motley Fool has a disclosure policy.